An LLC is a newer form of business entity. It has advantages over both the corporation and the partnership forms of operating a business. The LLC’s main advantage over a general partnership is that, like the owners (shareholders) of a corporation, the owners (members) of an LLC are generally not responsible financially for the debts and obligations incurred in the course of the LLC’s business. In addition, an LLC has the flexibility to be taxed as a partnership, sole proprietorship, or corporation.
For California income tax purposes, an LLC with more than one member will be classified as a partnership, and an LLC with a single individual member will be treated as a sole proprietorship, unless the LLC chooses to be treated as a corporation. To be taxed as a corporation, the LLC files an election on a form with the Internal Revenue Service. California treats the LLC and its owners for income tax purposes in the same manner the LLC is treated for federal tax purposes.
Key Features
- An LLC may have one or more owners, and may have different classes of owners. In addition, an LLC may be owned by any combination of individuals or business entities. An LLC, therefore, is more flexible than an S-corporation with regards to types and numbers of owners.
- An LLC is treated as a legal entity separate from its owners, similar to how a corporation is treated, regardless of how the LLC is classified for tax purposes.
- In general, the owners (members) are shielded from individual liability for debts and obligations of the LLC.
- An LLC is formed by filing "articles of organization" with the California Secretary of State prior to conducting business.
- Forming an LLC is simpler and faster than forming and maintaining a corporation.
- LLCs do not issue stock, and are not required to hold annual meetings or keep written minutes, which a corporation must take in order to preserve the liability shield for its owners.
- Either before or after filing its articles of organization, the LLC members must enter into a verbal or written operating agreement. A formal, written agreement is advisable.
- An LLC is typically managed by its members, unless the members agree to have a manager manage the LLC’s business affairs.
- Generally, members of an LLC that are taxed as a partnership may agree to share the profits and losses in any manner. Members of an LLC classified as a corporation receive profits and losses in the same manner as shareholders of a corporation legally organized as such.
- An LLC’s life is perpetual in nature. However, the members may agree in the articles of organization or the operating agreement to a date or event that will cause the LLC to terminate. In addition, members of the LLC may vote at any time to end the business operations of the LLC.
Filing Guidelines
- All LLCs classified as corporations that organize in California, register in California, conduct business in California, or receive California source income, must file California Form 100. The California Form 100 must be filed by the 15th day of the third month after the close of the LLC’s taxable year.
- The LLC will be taxed at the corporate tax rate of 8.84 percent and will be subject to a minimum tax of $800.
- All LLCs classified as partnerships or disregarded entities that organize in California, register in California, or conduct business in California, must file California Form 568 Limited Liability Company Return of Income. California Form 568 must be filed by the 15th day of the fourth month after the close of the LLC’s taxable year.
- An LLC required to file Form 568 pays an annual tax of $800, and may be subject to a fee based on the LLC's total income from all sources derived from or attributable to the state of California. The annual tax is due by the 15th day of the fourth month of the taxable year, and is paid using CA Form 3522.
- In addition, an LLC filing Form 568 that has members that are not residents of California must file the agreements of those non-resident members acknowledging that California may tax them and may collect tax from them, agreeing to file a California return and pay tax on the members’ share of California source income of the LLC. For any non-residents that do not sign an agreement, the LLC must pay tax on the nonresidents’ share of LLC income.
Estimated Tax
If the Limited Liability Company is classified as a corporation and files California Form 100, the following estimated tax guidelines apply.
- The estimated tax is payable in four installments.
- Installments are due and payable on April 15th, June 15th, September 15th, and December 15th.
- Corporations complete Form 100-ES to report their estimated taxes.
- The amount of each installment is 25 percent of the total estimated tax due (estimated income multiplied by the appropriate tax rate).